With Junk Status Looming, PSA's Finance Arm May Be Its Savior

How does the French government save an ailing car maker that employs thousands of people without actually bailing out the auto maker? By baling out their finance unit, of course!

Banque PSA Finance, the credit arm of PSA, could see its loans become costlier if PSA’s debt is downgraded to “junk” status, a move that would hurt its ability to provide credit to dealers and consumers. With PSA locked in an ongoing, Europe-wide price war, it’s a debilitating position to be in. To make matters worse, BPF’s credit rating is tied to PSA’s, despite being on more solid financial footing. Finance arms are evaluated seperately by firms like Moody’s, but they are not allowed to be graded more than two notches higher than their parent company.

Automotive News Europe illustrates the severity of BPF’s situation relative to PSA’s auto making division.

As things stand, ‘BPF can refinance on the markets at around 4 percent, whereas Volkswagen is at 1-2 percent,’ said analyst Florent Couvreur of CM-CIC. ‘This is fueling VW’s sales offensive because it can offer loans at half the price,’ he added.

A multi-billion dollar rescue package, backed by major banks like BNP Paribas and Societe Generale includes a 1.5 billion euro credit line, government guaranteed funds worth 4 billion euro and 4 billion euro worth of postponed debt repayments.

PSA’s situation is dire. They are said to lose 350 euro on each car produced. 10,000 jobs and an assembly plant are on the chopping block. While the cuts are necessary to maintain the company’s financial integrity, France’s industry minister has pressed PSA to reduce the cuts, and demanded concessions in exchange for government assistance. In light of those realities, a bailout of PSA itself would be political poision. But a bailout of its financial arm…